Market Commentary 22nd January 2024 – from Charlie Hancock

Wednesday’s inflation data showed that the Consumer Prices Index (CPI) rose by more than expected in December 2023, with annual inflation at 4.0%. The data prompted some nervousness regarding inflation reaccelerating, given that November’s CPI print came in at 3.9%, however, a significant proportion of the goods and services measured by CPI continued to see price cuts during the month. Tax increases on tobacco resulted in the alcohol and tobacco basket of goods rising by 12.8% year-on-year, which contributed to the increase in the headline rate.

Retail sales data for December 2023 painted a relatively gloomy picture. Retail spending saw the biggest monthly decline since January 2021 (-3.2%), with a relatively broad based decline across retail categories. Data for wage growth showed that the UK labour market continued to cool during November, with basic pay rising by 6.5% on average, down from a peak of 8% in mid-2023.

A data release for the 4^th quarter showed that Germany’s economy shrank by 0.3% in 2023. Higher energy costs contributed to industrial production declining by 2% across the year, whilst service industries continued to grow but at a weaker pace than 2022. Although data for the final quarter of 2023 is yet to be released across the developed world, it is likely that Germany was the only G7 economy which shrank in 2023.

The president of the European Central Bank (ECB), Christine Lagarde, stated last week that interest rates are likely to be cut later than expected this year. Lagarde said that cuts were likely in the summer, with the central bank waiting for data regarding wage growth before making a decision by “late spring”.

A measure of consumer sentiment compiled by the University of Michigan improved this month, with the index now just below its long term average, whilst inflation expectations amongst consumers softened. Retail sales data for December 2023 came in better than expected, rising by 0.6%.

Factory activity in the New York state saw the steepest fall since May 2020 according to firms surveyed by the New York Federal Reserve. The data came in significantly worse than expected, with new orders falling sharply and the average number of hours worked by employees declining.

Sentiment on Chinese equities continued to deteriorate last week, with Tokyo overtaking Shanghai as Asia’s biggest equity market. Official data showed that China’s economy grew by 5.2% in 2023, meeting Beijing’s target for 5% growth. Other data showed that deflationary pressures remained in December, whilst property prices declined sharply. China’s representative at last week’s World Economic Forum in Davos, Li Qiang, signalled that Beijing will not be implementing large scale stimulus measures to revive economic growth. Qiang said that China would not “seek short-term growth while accumulating long-term risk”.

Data in Japan showed that inflationary pressures continued to subside in December, with core consumer prices rising by 2.3% year-on-year, down from the 2.5% recorded for November. The Bank of Japan (BoJ) have previously signalled that they would like to see sustainable levels of inflation before tightening monetary policy and so the central bank may wait for the outcome of wage negotiations in the Spring before making any policy changes.

A Governor at the Federal Reserve, Christopher Waller, stated during a conference last week that he does not see a need to cut interest rates as rapidly as the central bank has done in the past, citing healthy economic conditions.

GBP / EUR – Current 1.1657 Previous 1.1644

The Pound fell by 0.39% against the US Dollar, with the greenback strengthening. Against the Euro, the Pound gained 0.11%.